037 | Avoiding HOA Fraud

I always say that petty cash is a bad idea. Cash is can be difficult to account for cash can can go walking away and cash can be stolen. I always encourage people not to have petty cash and but petty cash for you know, for the sake of this discussion is, is small potatoes compared to you know what I'm talking about fraud it's you know 10s Or hundreds of 1000s of dollars that are that are stolen from communities.

Common Sense for Common Areas exists to help all 2 million volunteer board members nationwide have the right information at the right time to make the right decisions for their future. This podcast is sponsored by four companies that care about Board Members Association insights & Marketplace, Association Reserves, Community Financials, and Kevin Davis Insurance Services. You'll find links to their websites and social media in the show notes. Welcome back to Hoa insights common sense for common areas. I'm Robert Nordlund. And I'm here today with a special guest to talk about financial best practices, and specifically how to minimize the opportunities for fraud at your association. This is episode number 37. But before I introduce today's guest expert, I want to encourage everyone to check out episode number 36, where regular co host Kevin Davis shared how to avoid a big insurance claim at your association. Now, if you missed any other prior episodes, take a moment at the end of the program to subscribe to this podcast on any of the most popular podcast platforms. You can also listen from our podcast website, www Hoa insights.org are watch on our YouTube channel. And if you've got a hot topic, a crazy story or a question you'd like us to address, leave us a voicemail. And that would be 805-203-3130. Or send us an email at podcast at reserve study.com. Well, today, it's my pleasure to welcome back Russell bonds of community financials, who you last heard back in episode 16. Community financials is, as our listeners know, one of our sponsors. And we've asked Russell back because his firm provides the financial management services for community associations. And frankly, he's an expert in the field. So welcome to the program. Russell. Thanks for having me back. Robert. Well, I thought we could start today's program by asking a question from Lydia in New Jersey, how much money should we hold in our operating or a checking account? Well, hi, Lydia, thanks for your question. And I would say that it usually, there's no usual answer. So it depends on I would say that it depends on each community's needs. So you could be living in a four unit community or you could be living in a 400 unit community and so it would change drastically. But of course, you want to have enough money to pay your current obligations or your recurring bills so that you're not running a deficit, that you have money set aside going to fund your reserve. So you have a surplus that goes to reserve account, and then you're transferring on a regular basis, you're transferring on a monthly basis per whatever you have in your budget your budget for the year. But that, you know, that being said, if you want to use a rule of thumb, I would suggest, you know, keeping three months of your operating expenses in your, at least three months of operating expenses, in your in your checking account to cover, cover any of those things that might come up plus, also remember, many associations pay the insurance bill in one chunk. So you might be making sure you have additional money to cover that when it comes due. And so that that might plus up that three months, when you're getting closer to whenever that renewal is now well, I'm relieved, because sometimes we get clients who come to us with one bank account, and they say, Well, Robert, you're doing our reserves today. How much of that should we have in reserves? And how much should we leave in checking? And I've always told him two or three months and watch the time of year because of your big bills. And I think big bills is an insurance bill nowadays. And so I'm glad to hear you saying the same thing. I was kind of bracing myself for what do you might answer. Oh, you were tracking. Okay, good. I like that. Well, let's talk about fraud. We actually have some clients who tell us they don't want to collect reserves, because they don't want their for the board to misappropriate for the board to steal. Is fraud, really a big asset a really a big concern. Is it difference? Is it different for the checking account or the reserve account? Well Fraud is real and unfortunately It happens more often in this industry than it should. And I've done, you know, I'll get into to a couple of couple of resources later on. But I learned about fraud from a firsthand experience where a, when I was running a property management company, a competitor accounting staff member had allegedly stolen over $2 million worth of funds from the association's and I know how they did it. And we'll get into that later on the episode. And, you know, I had to meet with board members looking for a new management solution after that, and had a profound impact on me personally, and the rest of my career, which is part of what I wanted to bring the systems and processes for transparency and great accounting to help communities around the country so that they didn't experience the same thing or go through the same thing that those board members did. Now, as far as you don't want to save money. Because you don't want to have fraud. Well, I think those are two different things. You want to save money so that you don't have to pay for money, when you need to borrow it from a bank, and they want to save money so it's predictable for your homeowners. They don't have to get, you know, a letter in the mail that says they've got an unexpected special assessment that's coming up. So yeah, well, I would say letting you want over right there want to keep the funds in the reserve, the two different accounts, right, primarily, you have a tracking account, and then an operating reserve account. And then, as far as the concern about reserve funds being stolen, I would just say that typically, reserve accounts don't have, or most often don't have check checkbooks with them, right. So there's probably less likelihood that that funds would be stolen, because there's, there's typically more times you're going to have more checks available for an operating account with your, for your regular funds. So is fraud, then, more commonly, a little bit of money repeatedly over a long period of time, rather than all of a sudden, 50 grand or 100 grand going missing? Typically, yes. And it can happen not only from it happens from all different ways. So it happens from a board member, it can happen from on site staff. It can happen from a management company, I've probably done over 20 case studies of fraud and embezzlement in different states by different you know, and all three of those different types of people that that might steal funds, and to see what why, how they did it, and how we could kind of reverse engineer to prevent it from happening. and so its a good point for us to discuss today. I like that. When I come up against it. In the reserve field, it's when they thought they had enough money for a project. And they realize it's not there in the bank account. Or they thought they hired someone to or they thought that they paid for someone to resurface the roof. And they realize that project didn't get done. It was a sweetheart deal with a insider and it was the fake roofer and the manager colluding to you know, get a big chunk of money and the work just didn't get done. So that, I guess, like you said, there's so You're absolutely right. And there are ways where there's many different ways it can happen. been fraud from we'll just talk about your particular case, fraud where the vendor is in cahoots with somebody, and they overbill the association, and it seems like a high price. Or maybe there weren't other bids. And then the you know, there's a kickback or some other some other way of of getting the money to the you know, the other party. And then the work ends up being sloppy work that oftentimes has to be redone anyway, so it's even more expensive for the association. Unfortunately, the next thing would be somebody creating a fake entity where they might have a fake company that they set up, and then they have bills paid to that fake entity. And it looks like they're trying to make it look like a vendor that could be also done by a board member or a management team member. It could also be where the checks are made out to There was one case in Florida, where a board member had made checks that were similar to her name, but it wasn't you know, it wasn't her name. End up being you know, that was what was happening and she was forging there even though there were dual signatures on the checks she was forging another board member's signature. There's other times when somebody just has the the checkbook, and then they're writing checks, and it's one person on the board in charge of the checkbook. And then they don't have the transparency so that other board members can really identify what's happening until they just noticed that there's no money in their bank account usually happens over time. And it's smaller increments of budget. And I think give me one minute one more example on site. This is a funny one on site, property manager had debit card for the association, and withdrew funds, and ended up withdrawing funds from a local casino. In addition to that, she also wrote herself additional paychecks because she was using just like kind of a desktop software version of payroll software, and he was writing herself additional checks. A lot of the ways that it happens are with controls around paying bills, and using the checkbook. If you were to summarize it, you're talking about controls around paying bills, or using the checkbook. And are you talking about physical checkbook or any kind of electronic payment, most of the time when they're reporting the fraud, it is, with physical checks, sometimes there were wires and you know, where what two people were in cahoots and one wired funds to the other person, but typically, they are, they are done by physical check. Now, the other part, you know, just to go off, where it could happen for receivables, where homeowner pay bills and homeowner payments are being put into a different account. So it's either commingled with the management company's account, and then the management company is using them for non Association reasons, or they set up a dummy account and put the money from the homeowner payments into that dummy account. And so that's another way of taking you know, and then they spend the money from the account that they set up those are also ways that it happened, but I would say that more frequently in the case studies that I went went through it was from you know, poor practices around paying bills. Is it I got two follow up so that one is Is it a petty cash issue? is it could be that they keep 100 bucks for minor things or is that is petty cash pretty much gone nowadays? Unfortunately, petty cash is not gone, I have run into prospects that come to us and asked about having petty cash, I always say that petty cash is a bad idea. Cash is can be difficult to account for cash can can go walking away. And cash can be stolen. I always encourage people not to have petty cash and but petty cash for you know, for the sake of this discussion is, is small potatoes compared to you know, maybe there's petty cash or $100 or $200 at an Association. But you know what I'm talking about fraud, it's, you know, 10s, or hundreds of 1000s of dollars that are that are stolen from communities. That's a good point, if someone if the janitor steals a 20 out of someone's desk, because they know that's where the petty cash is, that is almost immaterial. What about things like nowadays, Zelle or Venmo? Is that a red flag? Or can those be used appropriately? You know, I would say in most cases, with associations, they're going to have kind of a business checking account. And business checking accounts are different than personal checking account checking accounts, and most business checking accounts don't have Zelle or Venmo. Okay, those are mostly tied or linked to a personal checking account. So the in a, in a business banking account, and most of the banks that are, you know, that are going to that's specialize in working with homeowner associations, community associations, they're going to, they're going to have kind of permissions based methods of transferring funds by either ACH or check or a like other electronic means, but it's not going to be through Venmo or Zelle. Those have typically, like in our business we have, one person can initiate a wire or an ACH or and then the second person, the senior person has to approve it, so that there's dual control over that as well. So you want to look for that in your community also. controls so controls end up being one of the basic things. Yes. Fantastic. Okay. Well, let's, with that, we'll take a quick break to hear from one of our sponsors. And we'll be right back. Hi, I'm Kevin Davis, the president of Kevin Davis insurance offices are experienced team of underwriters, we'll help you, when you get that declination, we provide the voice of reason someone who will stand by you, our underwriters bring years of knowledge to our clients that can't be automated by technology, or driven by price. As a proud and wins company, we bring true value to your community association clients. We are your community association, insurance experts. And we're back during our break, Russell was telling stories and he said he had one more story and an example of another way fraud occurs. So Russell won't you tell our audience. Sure. So sometimes, you know, fraud can occur in a lot of different ways, like I mentioned, we mentioned before, but sometimes it's, it can seem more innocent, where a board member just isn't paying their their dues. There's some cases where a board member didn't pay their common charges for up to 10 years. And because you know, and then maybe they were one of only, you know, one or two people on the board. And they they felt, even though it wasn't in their declaration and bylaws that they were, do compensation for their role as a volunteer, which kind of flies in the face of being a volunteer so many times, you know, you got to be careful about that. Also, board members that are handy maybe and they say that they'll do some things around the association, and maybe they get compensated for it, you can. But you'll have to have something in writing where you feel that there's good value, and there's accountability, and there's transparency into paying for that. But you know, you may want to just you're clear that as well for, for the reasons. And then there's the last one is, you know, of course, if there's a vote to use a vendor, and the vendor is related to a person on the board, you want to make sure that that person on the board has to abstain from the vote, right? Right. So that there is no conflict of interest, they have to declare if there's a conflict of interest, and having a good delinquency and collections protocol is going and also transparency around your age receivables. And who owes money to the association is going to be ways that you can kind of, you know, make sure that that's not happening. Well, let's kind of transition here, let's take a different angle. If you suspect if you do the math, and you know you're paying $350 a month, and you just see a lot of things not happening at your association, you see the back bellows not going up. You suspect something of your association, what do you do as a homeowner or a board member? Unfortunately, I'm gonna save most of the times homeowners, and a lot of board members don't even see what's happening with the bank balances. Okay, so if that's that's the first red flag, so if you don't have a way of having banking information, which would mean bank statements added to the back of your financial report package, receiving financial reports at all, for a period of time, right? Have oftentimes I got customers that come to us say we haven't received financial reports, and three, six months. And that's a red flag. Even better is if you have worked with a company that has a portal where the bank balances and the bank transactions and the check images sync into that system so that you can have the complete visibility over the picture of your community like, like we provide to our clients. So those are ways that you can kind of steer clear of, of that type of activity. Well, is it on that line? Is it important? Or is it a value to have multiple board members with login access to the bank, so they can see that or that just put more sticky fingers into the bank balance that you wouldn't want to do? You'd want to have more than one person having access to the bank so that there is checks and balances and you want to have more than one person on the board having approval of you know, of invoices or paying bills, there's checks and balances. And then then there's got to be to two bad apples on your board that are in cahoots. And there's you know, typically that's going to be less likely than just having one lone lone actor that that does these types of things that in the systems these days, you know, to answer your question our system all the board members have access to that information so that they can can see it. Alright, so when it does happen if you do spot it, there's a couple of ways to spot one is the bank balance is lower than you expected, right. Second is if you're getting financial reports you have most of the most of the report packages the most like my favorite report is the income and expense report that shows the income coming in versus budget for the year and month to date and any variances. So you can spot variances, well, how come we're underfunded here, or how come this expense was way over budget, and then you can dig deeper into it. So you can look at that report to see then you can help to identify these things. Also, like I said, before the balances. And so when you do spot those things, that's when you can go looking for clues. In this case, the clues would be found on your bank statements where you can see where we've been talking about a lot of this is, well, how come I see all the check images that were with this bank statement, or I see all these withdrawals, and they don't match up or and it doesn't make sense to me that we're we're paying this vendor, I've never seen this vendor before. Or, you know, I saw that this this these bills went to a person or a name that looks very similar to somebody on our board, this bill to the contractor was supposed to be$40,000. And the check is for$60,000. So those are some ways that just were from the instances we were talking about before where you can take a look at it. So you can find a lot of information on going through the bank statement. And one of the things that you Association should have as part of their financial report package to make this easier, not only that report that I said with the variance and the bank statements, but also is the bank reconciliation report, which has which is a way at a point in time, right, because when financials are completed, that the what's shown on the financial reports, matches up with what's on the in the bank accounts. And so that bank reconciliation report should show that they're the you know, that everything matches up. And so that's one of those fraud prevention tools, as well as if you're making sure you're getting that in your report package. So if you're not getting reports on time, if you are not getting bank statements, if you are not getting bank reconciliation reports, those are red flags to me. And you know from that story I had mentioned earlier about where I had a competitor that stole those lots and lots of money. It was because the comptroller didn't provide bank reconciliation reports didn't provide bank statements and doctored the financial statements. Yeah, Russell is this, if we have a listener here, who is a homeowner who, you know, there's so many people out there who think that the homeowner assessments are too high, they don't see good things happening at their association. Number one, from my point of view, it's just a failure to appreciate that living in an a community association is is expensive, and it takes a lot of money, just to make it go. I believe in my heart that the actual occurrences of fraud are low. Of course, they're high enough that we want to minimize them and push them down. I agree. I agree with that. Yeah. But is there does a homeowner have the right to ask for those reports that you were talking about? So they can satisfy their curiosity, they can be the watchdog. And now it may be annoying to the board. But maybe that's their safeguard to have an independent homeowner, Mr. Smith or Mrs. Johnson in unit number 13? Who just studies that? And is that within the their right to ask for that and get that kind of information? And is that good? Sure. Well, let me start off by saying more involvement from homeowners and the community is always a good thing, I would suggest that person that has that interest. And maybe it's a person with some financial background, that person, I encourage them to join the board, to run for a seat on the board and be a volunteer on the board. And then you're going to be in those, you know, in the flow of all of that information on a monthly basis. And your voice can be heard. The next thing I would you know, the next best thing is some larger communities or some communities with more volunteerism have finance committees, and those people get together in there, theyre a body outside of the board, they review things and then they report to the board their findings. If there's it's usually more than one person, but maybe it could be you know, you could approach your board and ask if you could be the Finance Committee of one and your experiences youre a retired CPA or something Yeah, where you're just a concerned homeowner. But to go back to your initial question is yes, a homeowner can request to view specific information or the association and take a look at it. Now note. You're not going to be able to view age receivables report because delinquencies of homeowners violates privacy's avoid violations. Good point. And there are maybe they would redact some sensitive information, how much the Well, what is sensitive information? How much the managers paycheck is compared to the janitors paycheck? Eh I don't really think so I bet. Yeah, I would say that. What we try and encourage is that in when you're saying redacted, I would say it's not the complete financial report package, which has some reports, like the age receivable report that you can't share. But for most, most owners, we want to try and do is provide that level of understanding or transparency to them, and you would put the balance sheet, which shows how much money is in the different bank accounts, or how much money is owed to the credit, you know, if you have a credit card or owed to vendors and hasn't been paid yet, etc. And then you would have the comparative income and expense statement that's going to show the actual versus budget. So you'll see the budget and a variance, so you can see how your community is being run effectively or not effectively. And now, I would say that those are typically, you know, a lot of our customers will put the year end financial reports the balance sheet, and once it's been either it's sometimes it's been audited. And we can get into talking about that also. But you can be audited, or at least when it's closed, the year end is closed, and then you put it into there. And so in you share it with the homeowners so that they know at least how last year went and what it looks like. And as all of you can see all the income and expenses, line items broken out. Maybe there's one at the end of the year, maybe there's one mid year. And I usually provides that level of trust and transparency with homeowners. And maybe if there were bad things happen in your community, and then they were found out maybe your your homeowners might want to see that on a quarterly basis to improve that trust. Is it appropriate to send information out financial information out on a monthly basis with the board meeting minutes? you know, it's up to whatever the board and the homeowners decide is right for their community. So I've seen some smaller communities where they, they share that information out, got it on. And there's some communities where they do that on a monthly basis, maybe you know, we've got a portal where the homeowners can view certain documents, and the board members see different documents. So the complete report packet would sit in the board folder. But the real you know, the one that's just the balance sheet, and the income and expense report might go into the homeowner folder for them to be able to view whenever they log into the system. Yeah, well, I like transparency, I think transparency. And you've said it a number of times, you've said a couple of words that I caught. One is transparency. And you said that collaborating but co-, when you have two people doing bad things, so you want the internal controls to prevent the collusion. Those are some bad things going on. Well, Russ, I'll look at the clock, and it's time to be able to close down. So thank you for joining us, it was great to have you back on the program. Any parting thoughts as we close out this episode, I would say that most most people are honest, you know, great volunteers that are helping out the community, when other people in the community don't want to volunteer. we want to also provide a framework for board members to make sure that they're doing things in the best way. Because when they leave the board, they don't know who's going to come on the board to replace them. So you want to put into place a framework where you have these checks and balances, you've got the transparency, a lot of things where two board members are approving bills before they're paid. If you have a physical checkbook, you know, make sure you know where the where the blank checks are so that not just one person is writing checks, and nobody else is aware of it. And that you've got access to all the things that I talked about before. And on our website, there's a you know, I think it's 11 ways to avoid fraud and theft at your community that that listeners can go to and check out at communityfinancials.com to see if there's ways that they can improve things at their community excellent. I was gonna go right to that how can they get in touch with you? Well, communitiesfinancials.com And if they have a particular question for you, how can they get in touch with you? Best way is on the website communityfinancials.com And financials has an S at the end of it, just put in the contact form on the website and our staff will get it to me to to answer your question. Fantastic. Well, Russell, just fascinating stuff, important stuff, and great material to share with our audience. Well, we hope You learn some HOA insights from our discussion today that help you bring common sense to your common areas. We look forward to having you join us for another great episode next week. You've been listening to HOA Insights, Common Sense for Common Areas. You can listen to the show on our podcast website, hoainsights.org, or subscribe on any of the most popular podcast platforms. You can also watch the show on our YouTube channel. Check the show notes for helpful links. If you liked the show, and want to support the work we do, you can do so in a number of ways. The most important thing you can do is to engage in the conversation, email your questions or voice memos to podcast@reserve study.com Or leave us a voicemail at 805-203-3130. 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